Semimonthly pay periods for nonexempt salaried employees

STATE OF CALIFORNIA GRAY DAVIS, Governor

DEPARTMENT OF INDUSTRIAL RELATIONS
DIVISION OF LABOR STANDARDS ENFORCEMENT
LEGAL SECTION
320 W. 4th Street. Suite 430
Los Angeles. CA 90013
(213)897-1511

ANNE STEVASON, Acting Chief Counsel

                                     May 17, 2002



      Richard J. Simmons
      Sheppard, Mullin, Richter & Hampton
      333 South Hope Street, 48th Floor
      Los Angeles, California 90071-1448


                 Re: Labor Code §226 -- Semi-Monthly Pay Periods for
                       Non-Exempt Salaried Employees


      Dear Mr. Simmons :


           This is in response to your letter of January 2, 2002,
      concerning the application of Labor Code section 226 to the use
      of semi-monthly pay periods for non-exempt salaried employees.
      You state that your client pays its non-exempt salaried employees
      twice each month, and that they are paid l/24th of their annual
      salaries on each payday. The paydays are the 15th (or last
      working day before the 15th) and the last working day of each
      month. As is the case with all semi-monthly payrolls, the number
      of actual work days and thus, non-overtime work hours, varies
      from pay period to pay period.

           You further state that "adjustments for overtime pay and
      missed work are incorporated within the paycheck for the
      following payday," which you assert is "as specified in Labor
      Code section 204." These "adjustments," are based on an hourly
      rate, which you explain is computed by dividing the annual salary
      by 2,080 hours (i.e., 40 hours per week X 52 weeks per year).

           Next, you state that your client, in seeking to comply with
      Labor Code section 226's requirement for listing hours worked on
      the itemized statement attached to a paycheck, lists 86.67 hours
      as the hours worked per semi-monthly pay period, unless the
      employee works overtime or misses work. The 86.67 hours is based
      on dividing the total number of non-overtime hours in a year
      (2,080) by the number of pay periods in a year (24). You
      acknowledge, however, that because the number of work days and
      non-overtime work hours consistently varies from one semi-monthly

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pay period to another, pay periods never consist of precisely
86.67 hours. Yet, you suggest that because the hourly rate (also
known as the "regular rate of pay" for purposes of computing
overtime compensation) is calculated by dividing the annual
salary by 2,080 hours, "it will confuse employees" if your client
were to use a number other than 86.67 hours as the number of non-
overtime hours worked each pay period.

 It seems that some of this confusion is caused by your

client's use of semi-monthly instead of bi-weekly pay periods
(which do not result in varying amounts of scheduled non-overtime
hours), and your client's practice of issuing pay checks on the
last day of the pay period (thereby necessitating "adjustments"
for missed work or for overtime), rather than issuing paychecks
after the close of the pay period within the time permitted by
Labor Code §204, with all appropriate deductions for missed work
and extra payments for overtime encompassed in those paychecks.
To be sure, the use of semi-monthly pay periods and payment of
employees on the last day of the pay period are lawful pay
practices. However, the confusion that may be caused by
following such lawful practices cannot be ameliorated by non-
compliance with the explicit requirements of Labor Code §226,
namely: 1) the obligation to list "the total hours worked by the
employee" during the period for which the employee is paid, and
2) the obligation to list "all applicable hourly rates in effect
during the pay period and the corresponding number of hours
worked at each hourly rate by the employee."

 Labor Code §204 provides, in relevant part, that wages

earned during the course of employment must be paid no less
frequently than "twice during each calendar month, on days
designated in advance by the employer as regular paydays. Labor
performed between the 1st and 15th days, inclusive, of any
calendar month shall be paid for between the 16th and the 26th of
the month during which the labor was performed, and labor
performed between the 16th and last day inclusive, of any
calendar month shall be paid for between the 1st and 10th day of
the following month." However, not all wages earned during the
pay period must be paid on the next regular payday, as section
204 further states: "Notwithstanding any other provision of this
section, all wages earned for labor in excess of the normal work
period shall be paid no later than the payday for the next
regular payroll period." The term "labor in excess of the normal
work period" means all non-regularly scheduled overtime. All
other hours worked - i.e., all non-overtime work and all
regularly scheduled overtime - does not constitute "labor in
excess of the normal work period" within the meaning of section
204, and thus, must be paid on the payday for the pay period in
which the work was performed.

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 Your client's practice of paying its employees on the last

day of the pay period, rather than sometime during the 10 or 11
day period after the end of the pay period (as permitted by Labor
Code §204), is clearly authorized by Labor Code §219, which
provides: "Nothing in this article shall in any way limit or
prohibit the payment of wages at more frequent intervals, or in
greater amounts, or in full when or before due. . .

 As a general rule, the obligation to list the total hours

worked during the pay period can only be satisfied by listing the
precise, actual number of hours worked. The only express
exception to this requirement is that hours worked need not be
listed for "any employee whose compensation is solely based on a
salary and who is exempt from payment of overtime under
subdivision (a) of section 515 or any applicable order of the
Industrial Welfare Commission." (Labor Code §226(a)(2), emphasis
added.) With the enactment of AB 2509, the Legislature amended
Labor Code §226 to require the listing of hours worked for all
non-exempt employees, whether they are paid by salary,
commission, piece rate, or on an hourly basis. The reason for
this requirement is simple enough-it is designed to provide the
employee with a record of hours worked, and to assist the
employee in determining whether he has been compensated properly
for all of his or her hours worked. The failure to list the
precise number of hours worked during the pay period conflicts
with the express language of the statute and stands in the way of
the statutory purpose. Thus, the answer to the first question
posed by your letter -- whether it is permissible under section
226 to list 86.67 hours in the itemized wage statement when that
is not a precise reflection of the number of hours worked in the
pay period -- is no, this practice violates Labor Code §226.

 Prior to the enactment of AB 2509, Labor Code §226 did not

apply to any employees who were paid by salary, even if they were
non-exempt. But with the amendment of section 226, which took
effect on Janaury 1, 2001, the procedure followed by your client
of listing "averaged" hours each pay period that do not reflect
actual hours worked became unlawful. Although we do not read
section 226 as prohibiting an employer from paying its employees
in advance of the date that wages are due under Labor Code §204,
it is fairly obvious that such advance payments (if made on the
last day or prior to the last day of the pay period) would make
it impossible for the employer to accurately list all hours
worked (as some of those hours would not yet have been worked) on
the itemized wage statement attached to the paycheck. We can
think of two possible solutions to this dilemma. Of course, the
simplest solution would be to change the paydays so that
paychecks are issued after the close of the pay period, within
the time permitted under section 204, so as to allow the employer
to accurately list all hours worked during the pay period.

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Alternatively, if the employer decides to continue its practice
of making advance payments, it would still need to list the
"total hours worked" during the pay period, which would have to
include both the hours that were worked prior to the time the
paystub is prepared, and the scheduled hours yet to be worked for
the remainder of the pay period. Obviously, to the extent that
these "hours worked" would be based, in part, on a projection of
hours not yet worked, the paystub attached to the next regular
paycheck should contain a category showing corrections to hours
worked that were listed on the prior paystub. These
"corrections" should reflect missed scheduled work that had been
listed as "hours worked" on the prior paystub, and unscheduled
overtime work that had not been listed as "hours worked" on the
prior paystub. Any corrections set out in a subsequently issued
paystub must state the inclusive dates of the pay period for
which the employer is correcting its initial report of hours
worked.

 You also ask whether the requirement of section 226(a)(9)

for listing "all applicable hourly rates in effect during the pay
period" can be satisfied by reporting one hourly rate each pay
period (i.e., that determined by dividing the annual salary by
2,080 hours) even though the number of work days and non-overtime
hours varies from one pay period to another. The hourly rate for
a non-exempt salaried employee must be determined in accordance
with Labor Code §515(d), which codifies the DLSE enforcement
practice that was upheld in Skyline Homes v. Department of
Industrial Relations (1985) 165 Cal.App.3d 239. Labor Code
§515(d) provides: "For purposes of computing the overtime rate of
compensation required to be paid to a non-exempt full time
salaried employee, the employee's regular hourly rate shall be
1/40 the employee's weekly salary." A non-exempt full time1
employee compensated by an annual salary would have his or her
weekly salary determined by dividing the annual salary by 52, and
then, the hourly rate would be determined by dividing that weekly
salary by 40, i.e, the annual salary would be divided by 2,080.
Thus, the "applicable hourly rate," within the meaning of section
226(a)(9), would remain constant as long as the full-time
employee's annual salary remains unchanged, regardless of
variations in the number of workdays and non-overtime work hours
in each semi-monthly pay period.

  1 For purposes of computing the regular hourly rate of pay, the term "full

time employment" means employment in which the employee is employed for 40 hours
per week. (Labor Code §515(c).) In accordance with Skyline Homes, the regular
hourly rate of a part time non-exempt salaried employee would be determined by
dividing the employee's weekly salary by the number of weekly hours the employee
is regularly scheduled to work. For example, a non-exempt employee who is
employed to normally work 30 hours a week, and who is paid a salary of $600 a
week, is employed at a regular hourly rate of $20 per hour.

Page 5

 To minimize the possibility of confusion on the part of any

non-exempt salaried employee, it may be advisable for the
employer to specify, on the itemized wage statement, that this
hourly rate is based on the employee's annual (or monthly, or
weekly) salary, and to then set out the amount of that salary.
The employer may further choose to specify that overtime pay,
based on this hourly rate, is required for all hours worked in
excess of 8 in any workday or 40 in any workweek, and that
otherwise, this salary is deemed to compensate the employee for
all non-overtime hours worked, and that the amount of non
overtime hours worked will vary each semi-monthly pay period.

 By way of example: Assume a full-time non-exempt employee is

paid a salary of $52,000 a year. The regular hourly rate is
determined by dividing that annual salary by 52, for a weekly
salary of $1,000, and dividing that by 40, for a regular rate of
$25 an hour. Overtime must be paid at the rate of $37.50 an hour
for those hours for which the employee is entitled to one and a
half times the regular rate, and at $50 an hour for those hours
for which the employee is entitled to twice the regular rate.
This employee is paid 1/24 of his annual salary, $2,166.67, each
semi-monthly pay period for all scheduled non-overtime work,
despite the fact that the amount of scheduled non-overtime varies
from semi-monthly pay period to semi-monthly pay period. In
accordance with Labor Code §204, all overtime worked during the
pay period must be paid, no later than the payday for the next
regular pay period, at the rate of $37.50 or $50 an hour, as
applicable. Please note, however, that while Labor Code §204
permits this brief delay in payment of overtime, Labor Code §226
requires that all hours worked, including overtime hours, shall
be listed as part of the itemized wage and deduction statement
attached to the paycheck issued for the pay period in which the
work was performed--i.e., there cannot be a delay in reporting
overtime hours worked. We would thus recommend that if the
overtime hours are not paid until the pay period following the
pay period in which they are worked and reported, that the
employer advise the employees, in writing on the itemized wage
and deduction statement, that the overtime hours worked in this
pay period will be paid on the next paycheck.

 Other issues are presented by the "adjustments," at the

employee's regular hourly rate, for missed non-overtime work. We
will caution you by quoting from an opinion letter authored by
then Labor Commissioner Lloyd W. Aubry, Jr. on April 27, 1987:

Your client's plan to pay wages bi-monthly without
regard to number of days actually worked and then
deduct any overpayments; i.e., for time not worked
during the previous pay period, from the subsequent pay
period, would not be violative of Section 204. However,

Page 6

 any deductions representing overpayments made for the
 previous pay period should be agreed to in writing by
 the affected employee and specify the pay period, the
 date or dates and reason for the lost time, i.e.,
 unearned or unauthorized vacation, illness not covered
 by sick leave, etc.

Absent such voluntary written authorization, we would view these
"adjustments" as violative of Labor Code §221 and inconsistent
with CSEA v. State of California (1988) 198 Cal.App.3d 374.

 You next ask whether the requirements of section 226 could

be met, as to employees who receive "adjustments" for overtime
work or missed work in the paycheck issued following the pay
period during which the work was performed (or missed), by
providing those employees, on the day they are paid, with a copy
of their time records or time cards disclosing their actual hours
worked. As discussed above, section 226 requires that the
employer list the employee's total hours worked during the pay
period for which the employee is being paid -- total hours worked
necessarily includes all actual non-overtime hours and all
overtime hours worked. Section 226 expressly requires an
"itemized statement in writing showing ... total hours worked."
Time cards or other time records, if attached to a paycheck,
would satisfy section 226's requirement for a statement of total
hours worked if the total hours worked during the pay period are
separately listed on the time cards or other time records prior
to the time these records are provided to the employee. If it is
left to the employee to add up the daily hours shown on the time
cards or other records so that the employee must perform
arithmetic computations to determine the total hours worked
during the pay period, the requirements of section 226 would not
be met.

 Finally, you ask whether the $4,000 limit on penalties in

Section 226(b) is a limit on the total liability that an employer
can face regardless of the number of employes involved (i.e.,
$4,000 per employer), or whether it is a maximum of $4,000 per
employee (e.g., an employer with 10 employees would face a
maximum liability of $40,000) . Prior to the passage of AB 2509,
section 226(b) provided: "Any employee suffering injury as a
result of a knowing and intentional failure by an employer to
comply with subdivision (a) shall be entitled to recover all
actual damages or $100, whichever is greater, plus costs and
reasonable attorney fees." The statute now provides: "Any
employee . . . shall be entitled to recover the greater of all
actual damages or $50 for the initial pay period in which a
violation occurs and $100 per employee for each violation in a
subsequent pay period, not exceeding an aggregate penalty of
$4,000, and shall be entitled to an award of costs and reasonable

Page 7

attorney's fees."

 The maximum "aggregate penalty" that the statute now

references is one that, based on the plain language of the
statute, is owed to "any employee." It is not a maximum for all
of the employer's employees. Indeed, the latter interpretation
flies in the face of AB 2509's legislative history, and in
particular, the final Senate bill analysis which explains that
the bill "entitles an aggrieved employee ... to the greater of
actual damages or penal damages . . . up to $4,000." To
interpret this statute as establishing a $4,000 maximum penalty
for an employer, rather than a $4,000 maximum penalty per
aggrieved employee, would fail to provide any sort of meaningful
compensation to the employees of a large employer. Such an
interpretation would fail to effectuate the purpose of this law.

 Thank you for your ongoing interest in California wage and

hour law. Feel free to contact us with any other questions.

                               Sincerely,



                               Anne Stevason
                               Acting Chief Counsel

AS/mel

cc : Arthur Lujan
Tom Grogan
Assistant Chiefs
Regional Managers
DLSE Attorneys
Bridget Bane, IWC